Purpose: The purpose of a Qualified Domestic Trust (known as a QDT or QDOT) is to preserve the marital deduction when the surviving spouse is not a United States citizen and the trust assets are likely to be subject to the federal estate tax if the marital deduction is not available. 

The Marital Deduction:  This deduction allows transfers of unlimited amounts of assets between spouses at death, but only if they are United States citizens.  The result is that the surviving spouse does not have to pay any tax on the estate of the first spouse to die, provided the surviving spouse is a citizen of the United States.  The marital deduction only postpones the federal estate tax on the estate, and, in some cases, may cost a married couple additional taxes if there are no other provisions to reduce estate taxes.  Click here for additional information:  A-B Trusts  The marital deduction is an important estate planning tool, and is useful in deferring taxation possibly for many years after the death of the first spouse.

The Problem for Non-Citizens:  If a married couple has an estate that is greater than the estate tax exemption ($3.5 million during 2009), and one or both of them are not citizens, they need a QDT to avoid estate taxes on the death of the first spouse.  For estates that are less than those amounts, no QDT is needed because no federal estate tax will be due. 

However, for estates greater than those amounts, no marital deduction will be allowed if the surviving spouse is not a U.S. citizen and does not become a citizen by the time that the estate tax return is filed.  Depending on the type of estate plan that the couple has, lack of a marital deduction could result in substantial estate taxes on the first death.  This can be avoided if the assets are transferred to a Qualified Domestic Trust (QDT). 

Requirements for a QDT:  To qualify as a QDT, a trust must meet the following requirements:

	At least one trustee must be a U.S. citizen or a U.S. bank.  If the QDT holds more than $2 million, the trustee must be a U.S. bank.
	No distribution can be made from the trust, except for income, unless the trustee who is the U.S. citizen or corporation has the right to withhold estate taxes from the distribution.
	The trust must meet Treasury regulations regarding the collection of any tax.
	The executor must elect on the estate tax return to treat the trust as a QDT.

After the death of the surviving spouse, the assets in the QDT are subject to the estate tax as though they were included in the estate of the first spouse to die.  These assets are not included in the surviving spouse's estate.

Income distributed from the QDT to the surviving spouse is subject to income tax, but not estate tax.  However, when principal is distributed from the QDT to the surviving spouse it is subject to estate tax, unless the distribution is made for hardship reasons.